Book early is the new flying mantra

MUMBAI: In the runup to Christmas and New Year, the one-way airfare from Mumbai to Goa on low cost airline SpiceJet has jumped up to Rs 12,000 (up from current levels of about Rs 2,500), as a new balance is struck between supply and demand.

The fares like hotel room rates have always been a function of supply and demand but yield management has now become a critical tool for the loss-making airlines, who are trying to maximise the revenues from every single passenger. Airlines are now attempting to change buyer behaviour through their pricing strategies.

The message is unequivocal. "Book early to save money." This is being reinforced by opening up seat inventories for sale six to nine months in advance and pricing them higher as the date of departure comes closer.

So while a Rs 12,000 price for a one way Mumbai-Goa journey on SpiceJet may sound incredible at any other time, the airline hopes that it will be worth paying for a passenger desperate to get to Goa on Christmas eve. All domestic carriers, are currently trying to hone the technique of forecasting demand such that they can maximise yields in the last few days before the flight.

Among those who have sought outside help on this are Air Deccan, which has hired Irish consultancy BGM Consult earlier this year to set up a revenue management system. BGM director Paul Byrne says even two years ago, revenue management was one of the dark things that airlines knew they must do, but didn't know how to.

In India, the earlier Apex (advance purchase system), which had fares based on 21 days, 7 days or 3 days purchase was not as flexible as the current systems where every flight is segmented and not all seats are offered together.

"The scary part is having to project passenger behaviour so accurately," he says. In the dynamic pricing situation, every airline is constantly looking over its shoulder to check fares being offered by rivals. Since its all on the net, it is much more transparent.

Everyone now uses scraper programmes to check each others fares, and if one large player cuts fares there is like a ripple effect within a day, as others make a correction, say travel agents. "Its almost like the stock market, everyone has built in parameters that if 'x' airline increases fares by 10%, we push up ours by 5%," says a Jet Airways source.

Airlines can often get this completely wrong, the most recent case being Diwali this year. All airlines priced themselves very high, thinking there will be higher than usual demand for travel.

But when the rush didn't materialise, someone pressed the panic button and cut fares and everyone followed in the race to the bottom, says an airline source. "Margins in the October quarter were very bad and everyone lost money," says Jeh Wadia, managing director Go Air.

International airlines have been using revenue management systems for the past decade and has evolved from airline staff predicting demand to algorithms being written by geeks. Globally, the three large players selling the system are Sabre, Pros and Navitar.

The challenge is to sell early but not to run out of inventory too soon, says Mr Byrne. If a flight is completely sold out a week before its departure, it is a failure. The idea is to protect seats for the best fares that can come closest to departure, he says.

Typically, Indian travellers including businessmen, make their travel decisions late. This is not good news for the airlines who would like to sell early and lock-in fares. Early bookings translate to more even cashflows, for the desperate carriers who are currently fighting with their backs to the wall.

Not surprising that, the low cost airlines like Air Deccan, SpiceJet and Go Air are all currently running promotions selling fares for the summer of 2007. "The promotions are just a way of luring customers in," says Ajay Singh, director SpiceJet.

On the first day of Air Deccan's Rs 9 offer announced in November, the airline raked revenues of Rs 13.5 crore in a day. "Of course all tickets sold were not for Rs 9," Mr Byrne said.

For Rs 9, the passenger would be flying on a Tuesday, Wednesday or Thursday, he says. Only about 30 seats of the 180 on the plane would be sold cheap. The rest would be gradually loaded into the system with the yield creeping up at roughly Rs 15 to Rs 20 everyday in India, he says.

Yield managers tread a thin line to build up a calendar with high fares for busy events that can be foreseen like festivals and weekends. Often, they can be outwitted by booking behaviour that is not typical, resulting in lower revenues. Since airline seats are perishable, finding the balance is often like playing a game of poker.